Corporate profit growth takes a dip in March quarter
July, 10th 2007
While bulls have taken charge, aggregate results for a bigger sample of companies for March 07 quarter, sound a cautionary note. Profit growth for a sample of 2,685 companies (set excludes financial services and petroleum sector companies) for which results were available, has come down from a high of 59% in December 06 quarter to 43% in March 07.
Sales growth has also declined, although marginally. As a result, net margin has come down by about 60 basis points (bps), whereas operating margin is down by 30 bps. Aggregate sales for the set has gone up to Rs 3,53,000 crore whereas net profit stands at Rs 39,112 crore.
However, there is still no reason to panic, feels Ficci secretary general Amit Mitra. Slowdown of profit growth is a result of margin squeeze, which has come about with greater competition. However, it is nothing to worry about as of now. What is of more importance right now is the momentum in the corporate world based on various changes aiding it to reach global benchmarks, he says.
Different sectors within the set show significant variation in their performance. Producers of cement and cement products have seen their profit growth come down from 170% to 70%, with sales growth also slowing down. However, the margin for the sector is still significant and it continues to gain from the demand-supply gap in the commodity.
For the metal sector, profit growth has come down from 125% to 40%, whereas for chemicals it has come down to 10%. Metals sector has seen some erosion in profits with the prices coming off their peak.
Engineering goods sector is among the few to record an increase in sales and profit growth. For the sector, results are quite interesting with operating margin going down but net margin going up by 90 bps. This has come about as a result of significant decline in growth of interest cost and tax provisions.
Among the various cost parameters, employee cost, interest and depreciation are the factors leading to slowdown in profit growth. On the positive front, raw material as a percent of sales, has come down by 80 bps, and is expected to remain moderate in near-term with softening or stabilising of various commodity prices, used by upstream companies.
How the stock markets behave in the coming days will, to a certain extent, depend on June 07 quarter results, which will be announced this month. While appreciating rupee is a big worry, market seems to have discounted it already and any positive deviation in the results could just be the trigger for the next bull charge.